How neutral is the choice of the allocation mechanism in cap-and-trade schemes? Evidence from the EU-ETS

The European Emission Trading Scheme (EU ETS) is the central EU policy instrument aimed at mitigating climate change. According to Coase (1960), the level of emissions for each firm in an emission trading, in equilibrium, does not depend on the assignment of property rights over the emissions but this could not be the case in a real-world system, with a lot of possible frictions, as transaction costs and behavioural anomalies. This paper exploits the asymmetry in the allocation mechanisms introduced from the third phase of the EU ETS to evaluate whether different allocation mechanisms are neutral in terms of emission abatement decisions. Results suggest a non-neutral role of the allocation mechanisms.